CONTRACT OF INDEMNITY & GUARANTEE

DEFINITION CLAUSE [S 124]

MODES OF CONTRACT OF INDEMNITY
Expressed:
When a person expressly promises to compensate the other from loss.
Implied :
When the contract is to be inferred from the conduct of the parties or from the
circumstances of the case.

PARTIES TO CONTRACT OF INDEMNITY:

INDEMNIFIER: The person who promises to indemnify.

INDEMNITY HOLDER: The person whose loss is to be indemnified

ILLUSTRATION

i. Adamson v Jarvis [5 LJ (OS) (CP)] :

Plaintiff, an autioneer, sold certain cattle on the instruction of the defendant. It
subsequently turned out that the livestock did not belong to the defendant, but to
another person, who made the auctioneer liable an the auctioneer in his turn sued
the defendant for the loss suffered.
ii. Secretary of State v Bank of India Ltd [(1938) 175 IC 327 (PC)]:
A note with forged indorsement was given to a bank which received it for value
and in good faith. The bank sent it to the Public Debt Office for renewal in their
name. The true owner of the note recovered compensation from the State and the
State allowed to recover from the bank on an implied promise of indemnity

Motor insurance, Marine insurance, Fire insurance are instances of contract of

indemnity except Life insurance

ILLUSTRATION

iii. Hdfc Ergo General Insurance Co. vs Bhagchand Saini [ 4 December, 2014]

The insured informed the insurer of theft of his vehicle after a delay of 3
months. The information to police was after a delay of 2 days. The insurer
repudiated the claim on the ground that the enormous delay in notification was
in violation of policy conditions..
The Insurance Company was well within its rights to repudiate the claim on
grounds of delayed intimation because there was violation of the policy
conditions, accordingly to which the insured was required to inform the
Insurance company immediately after the incident.
The National Consumer Disputes Redressal Commission held that a minor
delay was also held to be justification for denial of the claim:

In the above case, a delay of 2 days in lodging the FIR and delay of 9 days in
reporting the matter to the Insurance Company was found fatal.
ILLUSTRATION[Sec. 125]
i. Mohit Kumar Saha v New India Assurance Co. Ltd [AIR 1997 Cal 179]
The motor vehicle of the plaintiff was under indemnity insurance for Rs. 2 lac and
it was stolen with no chances of recovery. The court held that the proper amount of
indemnity as fixed by the surveyor with an 18% interest for the delay should be
paid .Paying of lesser amount is arbitrary.
ESSENTIAL FEATURES OF A GUARANTEE
I. Must have all the essentials of a valid contract :

All the essentials of a valid contract must be present in the contract of

guarantee.

Exceptions:
(a) Consideration received by the principal debtor is a sufficient consideration to
the surety for giving the guarantee. [Sec 127]
(b) Even if principal debtor is incompetent to contract, the guarantee is valid. But,
if surety is incompetent to contract, the guarantee is void.
II. Liability of principle debtor and surety:

The principal debtor must be primarily liable. However, even if the principal
debtor is incompetent to contract the guarantee is valid.

The debt must be legally enforceable and must not be a time barred debt.

The liability of surety is secondary and conditional.

The liability of surety arises only if the principal debtor makes a default.

ESSENTIAL FEATURES OF A GUARANTEE contd..

III. No misrepresentation [Sec 142 -143]

The creditor should disclose all the facts which are likely to affect the suretys
liability.
There must not be any concealment of facts.

Guarantees for the good conduct of the servant have invited more frequent
application of this principle.
In the case of London General Omnibus Co v Holloway,([1912] 2 KB 72)
The defendant was invited to give a guarantee for the fidelity of a servant. The
employer had earlier discussed him for his dishonesty, failed to disclose this fact to
the surety. On an event of further misconduct, the surety cannot be held liable.

ESSENTIAL FEATURES OF A GUARANTEE contd..

In National Provincial Bank of England v Glanusk ([1913] 3 KB 335),
Banker received a guarantee with knowledge of circumstances seriously affecting
the credit of the customer (principle debtor), the surety is discharged from any
further liability on ground of misrepresentation / concealment

IV. Form of contract [S126]

A contract of guarantee may be either oral or written.
.

NATURE AND EXTENT OF SURETYS LIABILITY

1. Suretys liability is coextensive with the liability of principal debtor, unless it is
otherwise provided in the contract [S 128]
GENERAL RULE
Surety is liable for all the debts payable by the principal debtor to the creditor.
Accordingly, interest, damages, costs etc. may also be recovered from the surety.

Bank of India v Surendra Kumar Mishra, (2003) 1 BC 45 (Jhar)

Surety will also be affected ,where the principle debtor acknowledged liability and
this had the effect of extending the period of limitation against him
2. Commencement of suretys liability

The liability of surety arises immediately on default by the principal debtor.

The creditor is not required to

(a)first sue the principal debtor; or
(b)first give a notice to the principal debtor.

3. Suretys liability may be limited

The surety may fix a limit on his liability up to which the guarantee shall remain
effective.
4. Suretys liability may be continuous
The surety may agree to become liable for a series of transactions of continuous
nature.
However, the surety may fix

a limit on his liability upto which the guarantee shall remain effective;

5. Suretys liability may be conditional

The surety may impose certain conditions in the contract of guarantee. Until
those conditions are met, the surety shall not be liable.
Where there exist a condition precedent to the suretys liability, he will not be
liable unless that condition precedent is fulfilled

Sec144- Guarantee on contract that creditor shall not act on it until co-surety joins

Where a person gives a guarantee upon a contract that creditor shall not act upon
until another person has joined in it as co-surety, the guarantee is not valid if that
other person does not join
In National Provincial Bank of England v Brackenbury [(1906) 22 TLR 797]
The defendant signed a guarantee which on the face of it was intended to be a joint
and several guarantee of three other persons with him. One of them did not sign.
There being no agreement between the bank and the co-guarantors to dispense with
his signature , the defendant was held not liable

CONTINUING GUARANTEE
Meaning
A guarantee which extends to a series of transactions is called as continuing
guarantee. [Sec129]
Kay v Groves, [(1829) 80 ER 1274]

The principle debtor agreed to pay the amount of 5 sacks of flour to be

delivered in one month which will be delivered by the creditor (plaintiff) to the
principle debtor. Five sacks were supplied and principle debtor paid for it. Even
though principle debtor failed to make further payment for the subsequent
supplies. The surety cannot be sued as it was not part of the continuing
guarantee.

Revocation (Sec.130)

Continuing guarantee may be revoked, at anytime, by the surety by giving a

notice to the creditor. However, revocations shall be effective only in respect of
future transactions (i.e. the liability of the surety with regard to previous
transactions remains unaffected)

Death of surety (sec. 131)

Death of the surety operates as a revocation of a continuing guarantee as to

future transaction.

RIGHTS OF SURETY (Sec.140, 141, 145, 146 and 147)

I. Rights against principal debtor
Right of subrogation [Sec 140]

On payment of a debt, the surety shall be entitled to all the rights which the
creditor could claim against the principal debtor.

- The surety will step on to the shoes of the creditor

In Lampleigh Iron Ore Co Ltd, Re ([1927] 1Ch 308)
A director of a company in liquidation guaranteed and paid the rents due from the
company before the date of liquidation. It was held that he was entitled to stand in
the place of the creditor, and to use all remedies, if need be , in the name of the
creditor in any action to obtain compensation from the principle debtor for the loss
sustained
.

Right of Indemnity [Sec145]

There is an implied promise by the principal debtor to indemnify the surety.

The surety is entitled to claim from the principal debtor all the sums which he
has rightfully paid. This was also laid down in the case of C.K.Aboobacker v
K.P.Ayishu, AIR 2000 Ker 29(NOC)
The surety cannot recover such sums, which the he has paid wrongfully.

II. Rights against the creditor

Right to Securities [Sec 141]

The surety can claim all the securities which the creditor had at the time of
giving of guarantee
It is immaterial as to whether the surety had knowledge of such securities or
not.
If the securities are returned by the creditor to the principal debtor the surety is
discharged to the extent of value of the securities so returned.

In Craythorne v Swinburne [(1807) 14 Ves 160]

Court held that surety is entitled to every remedy which the creditor has against the
principle debtor, including enforcement of every security.
M. Ramnarain (P) Ltd v State Transport Corporation AIR1988 Bom 45.
Where certain bills of exchange were given by way of collateral security and they
being dishonoured, the creditor made them useless by not doing anything within
the period of limitation, the surety was discharged to the extend of their value.
Right of set off

Any amount recoverable by the principal debtor may be claimed as deduction.

Any amount recoverable by the surety may be claimed as deduction.

III. Rights against co-sureties

Effect of Releasing a Surety [Sec 138]:
Release of one co-surety does not discharge others
The creditor may at his will release any of the co- sureties from his liability. But
that will not operate as a discharge of other co- sureties
Sri Chand v Jagdish Parshad Kishen Chand [AIR 1966 SC 1427]

The court held that however the released co-surety will remain liable to the others
for the contribution in the event of default

.
.

Rights to contribution [Sec 146-147]

General Rule
All the co-sureties shall contribute equally
Exceptions

.
.

Under the contract of guarantee, the co-sureties may fix limits on their
respective liabilities. Even in such a case, the co-sureties shall contribute
equally, subject to maximum limit fixed by the co-sureties.
The contract of guarantee may provide that the co-sureties shall contribute in
some other proportion.

DISCHARGE OF SURETY FROM LIABILITY [SECS 130 - 144]

1. By Revocation
Specific guarantee

A specific guarantee can be revoked only if liability of principal debtor has not
arisen.

Continuing guarantee

A continuing guarantee can be revoked only in respect of future transactions.

[S. 130]

In Wingfield v Croin, (1919) 35 TLR 432,

A person made a guarantee of paying off the rent of his servant and revoked the
guarantee as soon as he left the job, thus the surety is not liable to make the rents
which became due after the revocation.

.
.

In Harigopal Agarwal v State Bank of India, AIR 1956 Mad 211,

The Companys director guaranteed the payment of the Companys
overdraft and subsequently resigned their office and the bank was informed, it was
held that the liability of the directors would be confined to the amount due upto the
date of resignation
2. By death of Surety [S 131]

A continuing guarantee is also determined by the death of the surety unless

there is a contract to the contrary. Once again, the termination becomes
effective only for future transaction, the suretys heir can be sued for liability
already incurred and can be revoked only in respect of future transactions.

3. By Variance [S 133]
If

Any variation is made subsequent to formation of contact of guarantee; and

Such variation is made without the consent of surety;

Then

The surety shall be released for such transactions as take place after such
variation.

In Bonar v Macdonald ,(1850) 3 HLC 226

The conduct of the manager of a bank was guaranteed by the surety. Subsequently,
bank without making a communication to the surety raised the managers salary
on the condition that he would be liable for any kind of discounts allowed by him.
Thus any loss incurred by the manager with respect to the same, the surety cannot
be held liable

.
.

If
- variance is beneficial to the surety or if it is not material
In M.S. Anirudhan v Thomcos Bank Ltd [(1963) SC 746]
The surety (defendant) guaranteed the repayment of a loan given by the creditor
(Bank-plaintiff) to the principle debtor. The guarantee paper showed the loan to be
Rs 25,000. The bank refused to accept. Subsequently, the principle debtor reduced
the amount to Rs.20,000 ad without intimation to the surety gave it to the creditor
which was then accepted. Principle debtor failed to pay and the bank sued the
surety. The question before the court was whether the surety can be discharged
from the liability. And the Court held that suretys liability exist as the variation is
not material in nature

.
.

4. Release / discharge of principle debtor [Sec 134]

If

The creditor makes a fresh contract with the principal debtor whereby the
principal debtor is relieved from his liability; or
The creditor does any act or omission resulting in discharge of the principal
debtor;

There exist a contract for the construction of a building and the performance
is guaranteed by the surety, and the creditor supply the building material. An
omission on his part to do so would discharge the contractor and so would the
surety would also be discharged
Then

The surety is discharged.

.
.

5. Composition, extension of time and promise not to sue [Sec 135]

i. Composition (compromise) with principal debtor

The surety is discharged if the creditor makes a composition with the principal
debtor without obtaining the consent of surety.
ii. Giving extension of time to principal debtor

The surety is discharged if the creditor extends the time for repayment of the
debt by the principal debtor without obtaining the consent of the surety

In Usha Devi v Bhagwan Das, AIR 1967 MP 250

The court held that the creditor has no right and it is against the faith of his
contract, to give time to the principle debtor without informing the surety about the
same.

.
.

In Wandoor Jupiter Chits v K.P. Mathew, AIR 190 Ker 190,

The court held that the acknowledgment of prolongation of period of limitation to
the surety will also make the surety to be liable for the extended time period if
made with the consent.

iii. Promise not to sue the principal debtor

A promise not to sue is made under an agreement with the creditor with
principle debtor. Thus when creditor promises not to sue the principle debtor,
the surety can also use this right for the creditor not suing the surety also.


.
.

Exception Sec 137

Creditors Forbearance to sue does not discharge the surety- When the creditor
deprived himself of the power of suing , does not discharge the surety liability

.
.

In Mahanth Singh v U Bi Yi, [ AIR 1939 PC 410],

The plaintiff (creditor) was engaged as a contractor by certain trustees of a

pagoda (Hindu/ Buddhist temple- shrine/ stupa /memorial) for the purpose of
construction work. The payment to be made to the contractors by the
trustees(principle debtor) was guaranteed by the defendant (surety).
Subsequently, the trustees defaulted and contractor sued defendants and the
trustees. But after that the beneficiaries replaced the trustees and thereby plaintiff
dropped his case against the trustees and was not allowed to sue the in their
personal capacity. But surety cannot be discharged and the suit against surety was
maintained.

.
.

iv. Promise to give Time Made with Third Party[Sec 136]

The creditor whereby enters into a contract with the third person other than the
principle debtor and surety with regard to the extension of time for the principle
debtor, the surety will not be discharged from his liability


.
.

v. By impairing suretys remedy [Sec139]

If the creditor does any act which is inconsistent with the rights of the surety, omits
to any act which his duty to the surety requires him to do, and the eventual remedy
of the surety himself against the principle debtor is impaired, the surety is
discharged.
Thus it is the plain duty of the creditor not to do anything inconsistent with the
right of the surety.

.
.

In State Bank of Saurashtra v Chitranjan Rangnath Raja [AIR 1980 SC 1528]

and in State Bank of India v Praveen Tanneries [ (1992) 2 Andh LJ 5]
The Bank (creditor) did not take sufficient care of the godown pledged to it against
a loan and consequently they were lost. The court allowed the surety, who had
guaranteed the loan to claim discharge from liability to the extent of the lost goods.

.
.

DIFFERENCE BETWEEN CONTRACT OF GUARANTEE AND

INDEMNITY


.
.

.
.

LAW OF BAILMENT

MEANING OF CONTRACT OF BAILMENT (Sec. 148)

PARTIES TO A CONTRACT OF BAILMENT (Sec. 148)

 ILLUSTRATION

BAILMENT BASED ON BENEFIT

ILLUSTRATION

BAILMENT BASED ON AWARD

ESSENTIALS OF A VALID CONTRACT OF BAILMENT (Sec.148)

1. Delivery upon Contract

There must be a contract satisfying the essentials of a valid contract.

The contract may be expressed or implied.
Delivery of goods should be made for some purpose and upon a contract that
when the purpose is accomplished the goods shall be returned
In Ram Gulamv Government of U.P [AIR 1950 All 206]
The plaintiffs ornaments having being stolen were recovered by the police and,
while in police custody was stolen again. The plaintiffs action against the State for
the loss was dismissed.

Because the ornaments were not made over to the Govt. under any contract, the
Govt. never occupied the position of bailee to indemnify the plaintiff.

2. Existence of Goods

Bailment can be made of goods only.

4. Purpose of delivery

The goods must be delivered for some purpose.

The purpose may be expressed or implied.
5. Return or disposal of goods Conditional delivery
The delivery of goods must be conditional
The condition shall be that the goods shall be
returned (either in original form or in any altered from); or
disposed of according to the directions of the bailor, when the purpose is
accomplished.

In Union Bank of India v K. V. Venugopalan, [AIR 1990 Ker 223] ,a deposit of

money with a banker is not a bailment as he is not bound to return the same notes
and coins.
6. Delivery of Possession:
The most important characteristics is delivery of possession and not mere custody.
One who has custody without possession like a servant is not a bailee

In Ultzen v Nicolls, ([1894] 1 QB 92)

The plaintiff, an old customer, went into a restaurant for the purpose of dining
there. When he entered the room a waiter took his coat, without being asked, and
hung it on a hook behind him. When the plaintiff was about to leave the coat was
not found.
Even if the waiter did the act as a part of courtesy, yet the restaurant keeper was
held liable as a bailee
In Kaliapermmal Pillai v Visalakshmi, (AIR 1938 Mad 32)
A lady handed over to a goldsmith certain jewels for the purpose of being melted
and utilised for making new jewels.Every evening as soon as the goldsmiths work
for the day was over, the lady used to receive half- made jewels from the goldsmith
and put them into a box in the goldsmiths room and kept the key in her possession.
The jewels were lost one night. But the ladys action against the goldsmith failed.

In Jagdish Chandra Trikha v PNB, [AIR 1998 Del 266]

If the jewellery box with the declared contents was handed over to a bank for safe
custody, the relationship of bailment was constituted, the bank was held for the loss
of contents.

MODES OF DELIVERY (Sec.149)

Sec 149 deals with how the delivery to bailee is made
1. Actual Delivery

Transfer of physical possession of goods from one person to another

2. Constructive Delivery
If

A person is already in possession of goods

of owner.

Such person contracts to hold the goods as a

bailee for a third person.
Then

Such person becomes the bailee, and the third

person becomes the bailor.

In Bank of Chittor v Narasimbulu, AIR 1966 AP 163

When a person pledged the projector machinery of his cinema under an agreement
which allowed him to retain the machinery for the use of the cinema.
Even though the bailor continued to remain in possession, it was in the possession
of the bailee.
The legal character of the possession of the goods changed eventhough physical
transfer did not take place.

DUTIES OF A BAILOR (Sec. 150, 158, 159 and 164)

1. Duty to Disclose faults in goods [Sec. 150]:

Bailor is bound to disclose to Bailee, faults in the goods bailed, of which he has
knowledge. He should also disclose such information which
(a) materially interferes with the use of goods,
the Bailee to extraordinary risk.
LIABILITY FOR DEFECTS IN GOODS

or

(b) expose

 Example: A owning a motorcycle, allows B, his friend, to take it for a joy ride.
A knows that its brakes were not proper but does not disclose it to B. B meets
with an accident. A is liable to compensate B for damages. But when A had lent
the motorcycle on hire, he is liable to B even if he did not know of the failure
of his brakes.

2. Duty to Bear expenses [Sec.158]

EXPENSES OF BAILMENT

4. Duty to Indemnify the bailee for defective title [Sec 159]

The bailor shall indemnify the bailee for any loss caused to bailee due to defective
title of bailor.
Indemnify the bailee for premature termination
If

the bailment is gratuitous ; and

for a specific period.
Then
(a) the bailor may compel the bailee to return the goods before expiry of the period
of bailment; but
(b) the bailor shall indemnify the bailee for any loss incurred by the bailee.

5. Duty to Receive back the goods [Sec 164]

It is the duty of the bailor to receive back the goods, when returned by bailee.
If the bailor wrongfully refuses to receive back the goods, he shall be liable to
pay ordinary expenses of custody of goods incurred by the bailee.

DUTIES OF A BAILEE
1. Duty to Take reasonable care [Sec 151]
The bailee must take such case of goods as a man of ordinary prudence would
take care of his own goods.
The bailee shall not be liable for any loss or destruction of goods, if
(a) he is not negligent; or
(b) the loss was caused due to an act of God or other unavoidable reasons.

In the case of Kavita Trehan v Balsara Hygiene Products Ltd, AIR 1992 Del 103
Court held that in all cases bailment bailee is bound to take as much care of the
gods bailed to him as a man of ordinary prudence.
Railway Company as a Bailee

The responsibility

of Railway Company as a career and also as a bailee

commences from the moment the goods are to the railway and continues until
the goods are unloaded at the destination point[Union of Indiav Sattur
Nataraja Traders, AIR 1992 Kant 301]
Under Sec 152, Bailee in the abscence of any special contract, is not responsible
for the loss, destruction or deterioration of the thing bailed, if he has taken the
amount of care as described under Sec 151

2.Duty Not to make unauthorized use of goods [Sec 153 & Sec154]
The bailee must not make any unauthorized use of the goods.

 If the bailee makes any unauthorized use of goods, then

(a) the bailment becomes voidable at the option of the

bailor; and

(b) the bailee shall be liable for any loss or damage .

In Allas v E.M. Patil, AIR 2004 Ker 214,
Where a vehicle was delivered to a workshop for repair and the owner of the
workshop allowed an unlicensed employee to drive the vehicle causing an accident
resulting in death of a person.
It was held that bailee was liable to compensate as it was an unauthorised use

3. Duty Not to mix goods [Sec 155 - 157]

Goods are mixed with bailors consent

The parties shall have a proportionate interest in such mixture.

Goods are mixed without bailors consent, but the goods are separable

The bailee shall pay the expenses of separation.

The bailee shall pay damage incurred by the bailor.
Eg: A bails 100 bales of cotton marked with a particular mark to B. B without As
consent, mixes the 100 bales of his own, bearing a different mark; A is entitled to
have his 100 bales returned, and B is bound to bear all the expenses incurred in the
separation of the bales, and any other incidental damage.

Goods are mixed without bailors consent, and goods are not separable

The bailee shall compensate the bailor for any loss caused to him.

Eg: A bails a barrel of Cape four worth Rs 45 to B.B, without As consent, mixes
the flour with country flour whih is only worth Rs. 25. B must compensate for the
whole loss.
4. Duty to Return the goods [Sec 160 & 165]
The bailee must return the goods, without waiting for demand from bailor, if
(a) the time specified in the contract has expired ; or
(b) the purpose specified in the contract is

accomplished.

If the goods are not so returned, then

(a) the goods shall be at the risk of the bailee;
(b) the bailee shall be liable for any loss or damage,
even if such loss is
caused without any fault or
negligence of the bailee or due to an act of God or
other unavoidable reasons
In Shaw &Co v Symmons & Sons ([1971] 1 KB 799),
The bailor entrusted books to the bailee, to be bound, the latter promising the
return within a reasonable time.
The plaintiff having required the defendant to deliver the whole of the books then
bound, the defendant failed to return, the books got subsequently burnt in an
accidental fire.
The defendant was held liable in damages for the loss of the books.
Bailment by several joint owners: If several joint owners of goods bail them, the
bailee may deliver them back to, or according to the directions of, one joint owner
without the consent of all, in the absence of any agreement to the contrary [Sec
165]

The plaintiff having required the defendant to deliver the whole of the books then
bound, the defendant failed to return, the books got subsequently burnt in an
accidental fire.
The defendant was held liable in damages for the loss of the books.
Bailment by several joint owners: If several joint owners of goods bail them, the
bailee may deliver them back to, or according to the directions of, one joint owner
without the consent of all, in the absence of any agreement to the contrary [Sec
165]

5. Duty to Return accretion to goods [Sec 163]

The bailee must return to the bailor any accretion (i.e., addition) to the goods
bailed.
A leaves a cow in the custody of B to be take care of. The cow has a calf. B is
bound to deliver the calf as well as the cow to A.
6. Duty Not to set up an jus tertii (claiming that goods belong to a third party)
[Sec 166- 167]

The bailee has no right to allege that the bailor had no authority to bail the
goods, as against the bailors demand, the defence of jus tertii

Even if there is a person who has a better title to the goods than that of the
bailor or who claims ownership of the goods, the bailee may safely return the
goods to the bailor and he will not be liable to the owner for a conversation.

The person who claims the ownership may apply to the court to prevent the bailee
from returning the goods to the bailor and to have the question of the title decided.
But if the bailee has already delivered it to the third person claiming ownership,
and if the bailer sues the bailee , he has to prove the better title of the third person.

RIGHTS OF A BAILOR
1. Right to terminate the bailment
If

The bailee does any act inconsistent with the terms and conditions of the
contract of bailment.
Then

The bailment becomes voidable at the option of the bailor.

Eg: A lets to B for hire, a horse for his own riding. B drives the horse in his
carriage. This, at the option of A, can terminate the bailment.

2. Right to file suit against wrongdoer [Sec 180 - 181]

The bailor has the right to sue

A third party who does any damages to the goods; or

A third party who deprives the bailee from using the goods

The compensation obtained in any such suit shall as between the bailor and bailee
can be dealt with accordingly to their respective interest.
In Umarani Sen v Sudhir Kumar, AIR 1984 Cal 230
A firm had consigned certain goods with a bailee along with a carrier, was allowed
to sue the carrier for the loss of the goods.

RIGHTS OF A BAILEE
.
1. Right to compensation [Sec 164]
The bailee has the right to be indemnified by the bailor, if

The bailor has no title to the goods; and

as a consequence, the bailee suffers some loss.
2. Return the goods

It is the duty as well as the right of the bailee to return the goods to the bailor.
In case of joint bailor, the goods may be returned to any of joint bailors.

3. Recover charges incurred [Sec 158]

Extra ordinary expenses

The bailor is liable to pay the extraordinary expenses.

The bailee may recover the extraordinary expenses paid by him.
Ordinary expenses

If the bailment is gratuitous, the bailor is liable to pay the ordinary necessary
expenses, i.e., the bailee has the right to recover the ordinary necessary
expenses incurred by him.
4. Right of lien [Sec170- 171]

The bailee has the right to retain the goods delivered to him until the charges
due to him are paid by the bailor.

i. Particular Lien[Sec 170]

As a general rule a bailee is entitled only to particular lien, which means the right
to retain only that particular property in respect of which the charge is due
Eg. A delivers a rough diamond to B, a jeweler to be cut and polished, which is
accordingly done. B is enitled to retain the stone till he is paid for the services he
has rendered
A gives cloth to B, a tailor to make into a coat, B promises A to deliver the coat as
soon as it is finished, and to give a three months credit for the price. B is entitled to
retain the coat until he has paid.

In Chand Mal v Ganda Sigh,(1885) Punj Rec No60,

When a bailee claimed lien for storage of sugar, it was held that such custody, not
being a service involving the exercise of labour or skill, the bailee was not entitled
to lien
In Tapeshwar Prasad & Co v R.C.& F. Ltd, AIR 1990 All 214
Lien not allowed for storage of fertilizers
Thus he right is available subject to certain conditions
1.the bailee must have rendered some services involving the exercise of labour or
skill in respect of the goods bailed.
2. the skill or labour excercised by the bailee must be such as to improve the goods

ii. General Lien [Sec 171]

The right to General lien is a special privilege on certain kinds of bailee only:
a. Bankers
b. Factors.
c. Wharfingers.
d. Attorneys of a High Court,and
e. Policy Brokers
A. Bankers.
A general lien can be exercised by bankers, attaches to all goods and securities
deposited with them as bankers by a customer or a third person on a customers
account, provided that there is no contract express or implied inconsistent with
such lien

In State Bank of India v Goutami Devi Gupta, (2003) I BC 165,

The surety is equally liable as a debtor and therefore the lender bank would have
lien on the suretys fixed deposits and other amounts lying on the bank
b. Factors:
Factor both in India and England means an agent entrusted with possession of
goods for the purpose of selling them for his principal.
He is given the possession of the goods in the ordinary course of his business for
the purpose of sale.
In E.H. Parakh v King Emperor, AIR 1926 Oudh 202,

Where a motor car is delivered to an agent for sale, he was held entitled to retain
the car until his charges were paid.

(c) Wharfingers:
Wharf a place adjacent to water, used for the purpose of loading and unloading
goods which is in transit via waterbody
Wharfinger- one who owns or keeps a wharf, manages it.
A Wharfinger also has a general lien on the goods bailed to him until his wharfage
charges are paid off.
(d) Attorneys of High Court:
An attorney who is engaged by a client is entitled to general lien until the fee for
his professional service and other costs incurred by him are paid.

In Balkesserbai v Narainji Walji, ILR (1880) 4 Bom 352,

The attorney has got the right to hold the paper entrusted to him subject to his lien
for cost.
But in R.D. Saxena v Balram Prasad Sharma, (2000) 7 SCC 264,

The advocates has no right of lien over the clients paper for their unpaid fee. The
court said that files containing copies of records could not be equated with the
goods referred in Sec 171. Therefore, no scope for converting case file into
money. Thus an advocate cannot place relaince on Sec 171.
TERMINATION OF BAILMENT
FINDER OF GOODS (Sec. 71, 168 and 169)
Finder of lost goods [Sec 71]

A person, who finds goods belonging to another and takes them into his
custody, is subject to the same responsibility as a Bailee.
Implied Agreement

There is an agreement, implied by law between finder and owner of goods.

Duties of Finder
A finder of lost goods is treated as Bailee of goods found. His duties are
(a) To take initiative to find the real owner of the goods,
(b) To take reasonable care of the goods found,
.

(c) Not to put the goods found for his personal use, and
(d) Not to mix the goods found with his own goods.

In Binstead v Buck (1976)2 Win BI 117

A finder fed a dog for 20 weeks and claimed 20 shillings for the same. The court
said that he would be liable to pay the reward for keeping it.

PLEDGE
MEANING OF PLEDGE, PAWNOR, PAWNEE (Sec.172)

 ESSENTIALS A VALID CONTRACT OF PLEDGE (Sec.172)

1. Contract

There must be a contract

The contract may be expressed or implied.
2.Goods

Pledge can be made of goods only.

3. Delivery

There must be delivery of goods by one person to another person.

4. Purpose of delivery

 The goods must be delivered for some purpose.

The purpose must be to deliver the goods as security for
(a) payment of a debt; or
(b) performance of a promise.
5.Return of goods
The delivery of goods must be conditional
The condition shall be that the goods shall be

returned (either in original form or in altered form); or

Disposed of according to the directions of the pawnor when the purpose is
accomplished

RIGHTS OF PAWNEE (Sec.173 - 176)

1. Right of Retainer [Sec.173]
Pawnee may retain the goods pledged for
(a) payment of the debt or the performance of

promise,

(b) any interest due on the debt; and

(c) all necessary expenses incurred by him with
for preservation of goods
pledged.

respect to possession or

In Bank of Bihar v State of Bihar,(1972) 3 SCC 196

1. A judgment has been obtained against the pawnor of goods and execution
proceedings followed
2. on bankruptcy of the pawner , the pawnee is a secured creditor with respect to
things pledged.

3. the goods which were under the pledge of a bank were seized by the State.
4. it was held that the seizure could not deprive the pledgee of his right to realise
the amount for which the goods were pledged and therefore the state was bound to
indemnify the banker.
2. Retainer for subsequent advances [Sec.174]
(a) Where the Pawnee lends money to the Pawnor subsequently, after the date of
pledge, it shall be presumed that the he has a right of retainer over the goods
already pledged in respect of the subsequent lending also.
(b) This presumption can be made invalid only by an express provision to that
effect.

2. Reimbursement of Expenses [Sec.175]

Where the Pawnee incurs extraordinary expenses to preserve the goods pledged
with him, he is entitled to receive such amount from the Pawnor.
3. Rights in case of default by Pawnor [Sec.176]
(a) Suit: Pawnee may institute a suit against Pawnor when there is a default in
payment of debt or performance of promise at the stipulated time.
(b) Retention / Sale of goods: Pawnee may
(a) retain the goods pledged as collateral security, or
b) sell the goods pledged by giving a reasonable notice to the Pawnor.
.
(c) Surplus / Deficit on Sale : When there is a surplus on sale, Pawnee shall pay
the excess to the Pawnor. In case of deficit, Pawnor shall be liable for the balance
amount.
(d) No Notice: Where the Pawnee does not give a reasonable notice to the Pawnor,
the sale is valid, but Pawnee is liable to pay damages to Pawnor.

In Lallan Prasad v Rahmat Ali (AIR 1967 SC 1322)

The defendant borrowed Rs. 20, 000 from the plaintiff on a promissory note and
gave him aeroscrapes worth Rs 35,000 as security for the loan. The plaintiff sued
for repayment of the loan, but was unable to produce the security, having sold it,
and therefore, his action for the loan was rejected.

.
In Prabhat Bank Ltd. vs Babu Ram
Reasonable notice u/s 176 means that a notice of intended sale of the security by
the Creditor within a certain date, so as to afford an opportunity to the Debtor to
pay the amount within the time mentioned in the notice. Notice of sale is essential
and a clause in the agreement excluding the requirement of Notice is inconsistent
with the Act & is void and unenforceable.

.
4. Right against true owner of goods [Sec.178A]

(a) Where the Pawnor has acquired possession of pledged goods, under a voidable
contract u/s 19 or 19A but contract has not been rescinded at the time of pledge, the
Pawnee acquires a good title to the goods, against the true owner.
(b) The title of Pawnee is good only where
(a) he had no notice of the Pawnors defect in title and
(b) he acts in good faith.

.
RIGHTS OF A PAWNOR (Sec.177)
1.Redeem the goods pledged
Meaning of redemption
Right to recover back the goods by making payment of the debt or performance of
promise.
Time for redemption
Where time of redemption is fixed, the pawnor may exercise redemption
(a) within the time so fixed; or
(b) even after expiry of time so fixed, provided
the pawnee has not sold the good; and
the pawnee pays the pawnee all expenses arising on account of his default.

Thus on satisfation of the debt or engagement extinguishes the pawn and the
pawnee on such satisfaction, is bound to redeliver the property. The pawnor has an
absolute right to redeem the property plegded upon the tender of the amount
advanced
.

2. Enforce pawnees duties

The pawnor has the right to enforce the duties of pawnee, if the pawnee fails to
fulfill his duties.
3. Receive increase in goods

The pawnor has the right to recover from pawnee any increase in goods
pledged.
4. Right to receive notice of sale

In case of default by the pawnor to pay the debt or perform his promise, the
pawnee has the right to sell the goods, after giving a reasonable notice to the
pawnor. If the pawnee fails to give notice, the pawnor has the right to recover
the loss incurred by him.

DUTIES OF A PAWNOR (Sec.175)

1.Pay the debt

The pawnor is liable to pay the debt or perform his promise as the case may be.
2.Pay deficit on sale

If the pawnee sells the goods due to default by the pawnor, the pawnor must
pay the deficit.
3. Pay extra ordinary expenses

The pawnor is liable to pay to the pawnee any extraordinary expenses incurred
by the pawnee for preservation of goods.

4.Disclose faults in goods

The pawnor is liable to disclose all the faults which

(a) are material for use of the goods; or
(b) may put the pawnee to extraordinary risks.
5. Indemnify the pawnee

If loss is caused to the pawnee due to defect in pawnors title to the goods, the
pawnor must indemnify the pawnee.

DUTIES OF PAWNEE
1. Not to use the goods

The pawnee has no right to use the goods . However, he may use the goods, if
he has been so authorised by the pawnor.
2. Return the goods

The pawnee must return the goods if the pawnor pays the debt or performs his
promise.
3. Take reasonable care

The pawnee must take such care of goods pledged as a man of ordinary
prudence would take care of his own goods.
4.Not to mix goods

The pawnee must not mix his own goods with the goods pledged.
5. Return increase in goods

The pawnee must return to the pawnor any accretion to the goods pledged with
him.

DIFFERNCE BETWEEN PLEDGE AND BAILMENT

BASIS

PLEDGE

BAILMENT

CONTRACT OF AGENCY

AGENT AND PRINCIPAL (Sec. 182)

In Krishna v Ganapathi, AIR 1955 Mad 648

Every person who acts for another is not an agent.

i. A domestic servant renders to his master a personal service;

ii. a person may till anothers filed or
iii.a person may work in a workshop or factory or mine or may be employed
upon his roads or ways.
In none of these capacities he is an agent and he is not acting for another in
dealings with a third person.

It

is only when he acts as a representative of the other in business

negotiations, that is to say, in the creation, modification of termination of

contractual obligation, between that other and third persons, that he is an
agent.

Thus representative character and derivative authority may briefly be said

to be the distinguishing feature of an agent.

ESSENTIALS OF AGENCY
1.Principal is liable for the acts of agent
The principal is liable for all the acts of an agent which are lawful and within
the scope of agents authority.
The contracts entered into by the agent on behalf of the principal have the same
legal consequences as if these contracts were made by the principal himself.

2. Who may employ an agent? [SEC183 ]

Any person may employ an agent if
He is of the age of majority; and
He is of sound mind.

3. Who can be an agent? [SEC 184]

Any person may become an agent.

Even a minor or a person of unsound mind can become an agent
But a agent is not responsible to an principal if he is a minor or is of unsound
mind.
4.. Requirement of consideration [SEC 185]

No consideration is necessary for creating an agency.

KINDS OF AGENTS
I. BASED ON AUTHORITY

I. BASED ON NATURE OF WORK

Del Credere Agent Another type of mercantile agent. Where an

agent undertakes, on the payment of some
extra commission, to be
liable to the principal
for the failure of the third party to perform the
contract.
However a Del Credere Agent is not responsible to the buyer for any
default on the part of the principal nor he is liable for any disputes between the
principal and the buyer relating to the contract or the sum due

DELEGATION OF AUTHORITY

SUB AGENT
A person who is employed by, and acting under the control of, the original agent in
the business of agency [Sec 190]
No delegation An Agent cannot lawfully employ another to perform acts which
he has expressly or impliedly undertaken to perform personally, unless by the
ordinary custom of trade a sub- agent may or, from the nature of the agency, a sub
agent must, be employed [Sec 191]
Proper Delegation -Principles representation When a sub agent is properly
appointed, the principal is, so far as regards third persons, represented by the subagent ,and is bound by and responsible for his acts, as if he were an agent
originally appointed by the principal [Sec 192]

Agentss responsibility for sub- agent- the agent is responsible to the principal
for the acts of the sub agent
Sub- agents responsibility The sub agent is responsible for his acts to the agent,
but not to the principal, except in cases of fraud or willful wrong
Improper Delegation - Agents responsibility for sub agent appointed without
authority
Where an agent, without having authority to do so, has appointed a person to act as
a sub- agent, the agent stands towards such person in the relation of a principal to
an agent, and is responsible for his acts both to the principal and to third persons;

The principal is not represented by or is responsible for the acts of the person so
employed , nor is that person responsible to the principal [Sec 193]

SUBSTITUTED AGENT [SEC 194- 195]

Where an agent ,holding a express or implied authority to name another person to
act for the principal in the business of the agency, has named another person
accordingly, such person is not a sub- agent, but an agent of the principal for such
par of the business of the agency as is entrusted to him
Eg A authorizes B, a merchant to recover the moneys due to A from C . B instructs
D, a solicitor, to take legal proceedings against C, for the recovery of the money. D
is not a sub- agent, but is solicitor for A.

CREATION OF AGENCY

I. Express agreement

A person may employ another person as his agent by entering into an express
agreement with him.

The agreement may be either oral or written.

Where an appointment is made by a deed, it is called a power of attorney

II. Implied Agreement

Implied Agencies arises from the
i. conduct
ii. Situation
iii. Relationship of parties

A. Agency by estoppel
If

a person makes a representation (by his words or conduct) to a third person

that a certain person is his agent; and

the third party believing such representation to be true, enters into a contract
with the pretended agent.
Then

the person making the representation is prevented from denying the truth of
agency. He may be held liable as a principal by such third party.
Agency of holding out

Such an agency comes into existence when a person by his affirmative or

positive conduct leads third persons to believe that person doing some act on
his behalf is doing with authority

In Cullen v. BMW, 490 F. Supp. 249 (E.D.N.Y. 1980).

1. Cullen paid an auto dealer for a car which was never delivered.
2. The manufacturer, BMW, had terminated its relationship with the dealer due to
customer complaints and financial irregularities, but he continued to sell from his
inventory of BMW cars and to use the BMW logo.
3.The question before the court was whether can Cullen sue BMW on grounds of
(a) agency by estoppel or (b) negligence in violation of a duty to customers?
4. BMW did not give actual authority to the dealer, and thus he was acting as a
pretended agent. Hence, the car dealer (agent) can be held liable and is estopped (
is prevented from denying the truth of agency) from denying its linkage with
BMW.

B. Husband and Wife relation

An implied agency exists between husband and wife.
A wife living with her husband has the implied authority of the husband to buy
articles of household necessity. A wifes implied authority to bind her husband by
her credit purchases , is however subject to some important limitations.
Firstly, it is necessary that the husband and wife should be living together.
Secondly, they must be living together in a domestic establishment of their own.
These two principles were established in the case of Debenham v Mellon([1880]
AC 24)

But a husband has no original, inherent or implied power to act as an agent for his
wife unless an appointment made by an express agreement or by ratification.
In Jawaharlal Dalmia & Co. v Chinta Chittermma [(1989) Adh LT 335],

A husband has no implied authority to sell his wifes property.

III. Agencies by necessity
(i) There was an actual and definite necessity for acting on behalf of the principal.
(ii) The agent was not in a position to communicate with the principal.
(iii) The act was done for the purpose of protecting the interest of his principal.
(iv) The agent has exercised such reasonable care as a man of ordinary prudence
would have exercised in his own case.
(v) The act was done bonafide.

Eg: When a injured person is in urgent need of medical attendance. Any person
acting on his behalf may call the services of a doctor; or any doctor may volunteer
his services. The person benefited is bound to pay the charges of the service.
In Matheson v Smiley (1944) 22 Can BR 492,
A surgeon was entitled to recover from the deceased mans estate reasonable
remuneration for his services when he had, without request, given aid to a man
who had attempted suicide.
IV. By Subsequent Ratification
If

a person (viz., pretended agent) acts on behalf of another person (viz, the
principal)

the pretended agent acts without the knowledge or consent of the principal;
and

Afterwards, the principal accepts such act.

Then

Agency by ratification comes into existence.

In Williams v North China Insurance Co, (1896) 1 CPD 757,

A person insures the goods of another without his authority, the owner may ratify
the policy and then the policy will be as valid as if the agent had been authorised
to insure the goods.
Ratification may be expressed or implied [Sec 197]
A without Bs authority lends Bs money to C. Afterwards B accepts interest on
the money from C.Bs conduct implies ratification of the loan

Effects of ratification

The principal is bound by the acts ratified by him as if such acts had been
performed by his authority. Thus establishes the relationship of agent and
principal insofar as the act ratifies is concerned between the person ratifying
and the person doing it

Ratification relates back to the actual date of the act that is ratified and not
from the date when the act ratified. [Sec 196- Doctrine of Relation Back]
In Bolton v Lambert [(1889) 41 Ch D 295],
1.The defendant made an offer to the managing director of a company, who
having no authority to do so, accepted it.
2. The company was to opt to ratify it or not. But the company had ratified only
after the defendant had withdrawn his offer.
3. The company sued for specific performance.

Conditions for a valid ratification

I. Knowledge of Facts [Sec 198]
No valid ratification can be made by a person whose knowledge of the facts of the
case is materially defective. In other words, the principal must have full
knowledge of all the material facts.
II. Whole Transaction [Sec 199]

It must be done for whole transaction in fact; ratification of the part of a

transaction operates as a ratification of the whole transaction.

III. Act on behalf of another person

The acts done by a person (i.e. pretended agent) on behalf of another person
(i.e. principal), who wants to ratify it, can only be ratified.
If the agent acts in his own name and makes no allusion to agency his act cannot
be ratified even if the agent in his secret mind intended to act for another.
In the famous decision, Keighley Maxsted & Co v Durant([1901] AC 240)
1. KM& Co authorised their agent to buy Karachi wheat at specified rates on their
account. Wheat was not obtainable at those rates.
2. He bought wheat from Durant at a higher rate. He did so in the hope and
confidence that his act would be adopted by the Principal and contracted in his
own name

3. The principal approved the purchase, but. when the price of wheat fell, refused
to take delivery
4. Durant sued the agent and principal for breach of contract. But the principal
were not held liable.
IV. By the principal

Ratification can be made by only such person for whom the act was done.
V. Existence of principal

The principal must be in existence at the time when the act was done in his
name
VI. Contractual capacity

The principal must have contractual capacity both at the time of entering into
the contract and at the time of ratification.

VII. Acts within principals power

Ratification can be made only for such acts which principal had the power to
do.

IX. Communication

Ratification must be communicated to the third party so as to bind him

X. Lawful Acts [Sec 200]

Only those acts which are lawful can be ratified. Void, illegal, or ultra vires
acts cannot be ratified.
A holds a lease from B, terminable on 3 months notice
C , (pretended agent) an unauthorised person gives notice of termination to A
The notice cannot be ratified by B, so as to be binding on A.

XII. Within reasonable time

Ratification must be made within reasonable time of the act purported to be

ratified.
In Metropolitan Asylum Board v Kingham & Son , [(1890) 6 TLR 217],
1. the tender for supply of eggs was approved by a board, but not formally.
2. the time for commencement of the performance was September.
3. But the Board ratified it on October 6.

4. It was held to be too late as it was done after the date fixed for performance.

DUTIES OF AN AGENT
I. Duty to Execute Mandate
The agent should perform the work which he has been appointed to do. Any
failure in this respect would make the agent liable for the principals loss.
In Pannalal Jankidas v Mohanlal, [AIR 1951 SC 144]
1. A commission agent purchased goods for his principal and stocked them in a
godown pending their dispatch.
2. The agent was under instruction to insure them. But failed to insure the goods.
3. The good were lost in an explosion.
4.The agent was held liable to compensate the principal for his loss.

II. Duty to Follow Instructions or customs [Sec211]

1. To conduct the business in accordance with the directions given by the
principal.
2. In the absence of directions, the agent has to follow the custom which prevails
in business of the same kind and at the place where the agent conducts the
business.
3. When the agent acts otherwise, if any loss be sustained, he must make it good
to his principal., and if any profit accrues, he must account for it.
In Llilley v Doubleday, [(1881) 7 QBD 510],
An agent was instructed to store the goods in one particular warehouse . But he
stored a part of them in a different place which was equally safe. But the goods
were destroyed without negligence.

III. Duty to Reasonable care and skill [Sec212]

Every agent is bound to carry on the business of agency with reasonable skill and
care. The standard of care and skill which an agent has to follow depends upon
the nature of his profession.
In Heys v Tindall, [(1861) 1 B & S 296], it was held that

1. An agent, having authority to sell on credit, must take care to ascertain the
solvency of his buyer.
2. An insurance broker must see that usual clauses for the protection of the
principal are inserted in the policy.
3. An estate agent should know the land laws and also must take care to ascertain
the solvency of the tenant

IV. Duty to avoid conflict of interest [Sec215]

1.An agent occupies fiduciary position and therefore, it is his duty not to do
anything which would bring his personal interest and his duty to the principal in
conflict with each other.
2. The conflict invariably arises when the agent is personally interested in the
principals transaction .
3. The agent involves his own account in the business without principals consent
and thereby puts him in a disadvantageous position.
Eg: An agent buys himself the property in which he was appointed to sell or
delivers his own goods when he is instructed to buy on his behalf of he principal

The principal has the following rights:

(a) He may repudiate the transaction, if the agent dishonestly conceals any
material facts or the dealings of the agent prove to be disadvantageous to him.
(b) He may claim from the agent the agency business other
agreed remuneration

than the

V. Duty not to make secret profit [Sec216]

Not to make any secret profit out of the agency business other than the agreed
remuneration
Eg: A directs his agent to buy a certain house for him . B tells A it cannot be
brought, and buys the house for himself. A may, on discovering that B has bought
the house, compel him to sell it to A at the price he gave for it
In Harrington v Victoria Graving Dock Co. (1878) 3 QBD 549,
Acceptance of bribe is a profit of this kind

VI. Duty to remit sums [Sec218]

To remit to the principal all the sums received in the principals accounts in
accordance with the terms and conditions of contract of agency.
VII. Duty to maintain accounts [Sec213]
For the proper performance of agents other duties, it is necessary to maintain
proper accounts
In Narandas v Papammal, [AIR 1967 SC 333],
Even the agent has got the right to sue the Principal under special circumstances
like where all the accounts are in the possession of the principal

VIII. Duty not to delegate [S 190]

Delegatus non protest delegare ,is a well known maxim of law of agency the
principal chooses a particular agent because he has trust and confidence in his
integrity and competence.
Therefore, ordinarily, the agent cannot further delegate the work which has been
delegated to his by principal. But there are exceptions:

1. Nature of Work : Sometimes the very nature of work mandates it necessary

for the agent to appoint a sub agent.
Eg: an agent appointed to sell an estate may retain the services of an auctioneer

2. Trade Custom: A sub- agent may be appointed and the work delegated to him
if there ordinary custom of trade to that effect.
Eg: Architects generally appoint surveyors. [Moon v Witne Union, (1837) 43 RR
802]
3. Ministerial Action: An agent cannot delegate acts which has expressly or
impliedly undertaken to perform personally,
Eg: Acts requiring personal or professional skill. But the agent may delegate acts
which are purely ministerial in nature , eg, authority to sign.[Mason v Joseph,
(1804) 1 SmithKB 406]
4. Principals consent: The principal may expressly allow his agent to appoint a
sub-agent. His consent also be implied from the conduct of the parties.
The principal may also ratify his agents unauthorised delegation .

RIGHTS OF AN AGENT
1. Right to remuneration [Sec 219]

To receive the agreed remuneration. If the remuneration is not fixed, then he

has the right to recover such remuneration as is usual and customary in such
business.
In Green v Barlett [(1863) 14 CS (NS) 681],
1. An agent was appointed to sell a house. He held an auction but failed to find a
purchaser.
2. One of the persons attending the auction obtained address of the Principal an
purchased the house without intervention of the agent.
3. Even so the transaction was held to be a result of the agents effort entitling him
to his commission
Effect of Misconduct [Sec 220]
An agent who is guilty of misconduct in the business of agency, is not entitled to
any remuneration in respect of that part of the business which he has
misconducted.
II. Right to retainer [Sec 217]

To retain money out of the sums received in agency business for advances
made or expenses incurred and remuneration due to him.

He can retain only such money as in possession and not entitled to equitable
lien[Bombay saw Mills Co, Re ,ILR (1888) 13 Bom 314]
III. Right to Lien [Sec 221]

Right of lien on principals goods, papers and other property until the amount
due to him in respect of the same is paid.

In Gopaldas v Thakurdas, AIR 1957 MB 20

1. The agents lien does not give unrestricted authority to the agent to deal with
the property in any manner the agent wishes to.
2. The right is limited in nature and it enables the agent to retain the property till
his dues are paid.
3. But this confers no authority on the agent to sell or otherwise dispose off the
property without the consent of the owner.
Loss of Lien:
The agents lien is lost in following circumstances:
1. When possession is lost as lien is a possessory right
i. Possession is lost when the agent delivers the goods to the principal
himself or to some carrier for the purpose of transmission to the principal, latter
case cannot revive the lien by stopping the goods in transit.

ii. The lien is lost when the agent waives his right. The waiver may be out of an
agreement, express or implied, or may be inferred from conduct inconsistent with
the right.
iii. if a contract to the contrary exists between agent and principal.
IV. Right to indemnity [Sec 222 and 223]

An agent has the right to be indemnified by the principal against the

consequences of all lawful acts done in exercise of the authority conferred on
him and against all consequences of acts done in good faith
In Hichens v Jackson [1943] Ac 266 HL
A stockbroker on the instructions of a solicitor, contracted to sell certain shares
and had to incur liability to the purchaser by reason of the owners refusal to
complete the sale, the stockbroker was held entitled to recover indemnity from the
principal.

V. Right to compensation [Sec 225]

An agent has the right to be indemnified by the principal against

consequences of acts done in good faith that caused an injury to third person.
A employs B as a bricklayer in building a house, and puts up the support
himself. The support is unskillfully put up, and B as a consequence gets hurt. A
must make the compensation to B.

PERSONAL LIABILITY OF AGENT [Sec 230]

General Rule No personal liability [ Sec.230]
In the absence of contract to contrary, an Agent cannot be

(a) personally enforce contracts entered into by him, on behalf of his

Principal,
(b) be held personally liable for them.
This is because the Agent merely acts on behalf of his Principal. Thus, he enjoys
immunity from being personally sued.
Exceptions, i.e. Agent personally as well as Joint & Severally Liable
The Agent is personally liable in the following cases

1. Foreign Principal [Sec.230] : Where the contract is made by an Agent for the
sale or purchase of goods for a merchant resident abroad.
Tutika Basavraju v Pary & Co, [(1903) 27 Mad315]
A company registered in England and having a place of business in India, has
been held to be a foreign principal for the purpose of this presumption and the
Indian agent acting for it was held personally liable.
2. Undisclosed Principal [Sec.230]: Where the Agent does not disclose the name
of his Principal.
Bhojabhai v Hayen Samuel ,[(1898) 22 Bom 754]
The Honorary Secretary of a school was held personally liable for the rent of a
house hired by him in his own name though for purposes of the school.

3. Non- existent or Incompetent Principal [Sec.230]:

Where the Principal, though disclosed, cannot be sued, e.g. Principal becoming of
unsound mind, subsequent to appointment of agent.
Shet Manibhai v Bai Rupaliba, [(1899) 24 Bom 166]
An agent who contracts for a minor, the minor being not liable, the agent becomes
personally liable.
4. Action against Agent or Principal [Sec 233] :
Where the Agent is personally liable, a person dealing with him may hold - (a)
either him or (b) his Principal or (c) both of them liable. The liability of Principal
and Agent is joint and several.

3. Pretended Agent [Sec.235]:

i. Liability of Pretended Agent : Where a person pretends to act as the agent of
another he may be saved by ratifying the act. But if no ratification is forthcoming
the pretended agent becomes liable to the third party for any loss.
ii. Person falsely contracting as agent, not entitled to performance:
When a person has, in fact , no principal, yet persuades the other to contract with
him as agent of another, he is estopped from saying that he had no principal. He
has to bare the liability.
4. Exclusive liability [Sec. 234] :

Where a person has made a contract with an Agent and

Induces such Agent to act upon it in the belief that only his principal would be
held liable,

Induces the principal to act upon it in the belief that only his Agent would be
held liable.

Such Third person cannot later on, shift the liability on to

The Agent, or
The principal, respectively.
5. Agent exceeds authority & act not ratified:
Where an Agent acts either without any authority or exceeds his authority, he
shall be held personally liable when the principal does not ratify his acts.
In Collen v Wright, [(1857 8 E& B 647)],
1. W was land agent for one G. W agreed to grant to the plaintiff a lease of Gs
farm for 121/2 years .
2. He honestly believed that he had the authority to do so. But W refused to
execute the lease deed.

3. G proved that he had given no such authority to the agent.

4. W (agent) ,having died in the meantime, the plaintiff sued his executors for the
loss he had suffered in entering upon the farm, and they were held liable.

SCOPE OF AUTHORITY
I. To determine the extend of Agents Authority [Sec 188]
An agent who is authorised to do an act or to conduct a business
, by the Principal,
has authority to do every lawful thing for fulfilling that act or has authority
to do every lawful thing necessary for the conduct of the business respectively.
i. Every agent has the implied authority to act according to the custom and usage
of a particular market or trade.
ii. The principal is bound by such usage even if he is unaware of them or even if it
conflicts with his instructions.
iii. But not bound if the custom or usage is unlawful or unreasonable and also any
custom or usage is unreasonable if it changes the very nature of agency.

In Dingle v Hare, (1859) 7 CB (NS) 145

1. An agent was authorised to sell artificial manure. He had no authority to give a
warranty about the goods. Yet he warranted to the buyer that the manure
contained 30% phosphate of lime.
2. The warranty turned out to be false and the principal was sued for breach.
3. The principal is held liable because it was usual in the artificial manure trade to
give a warranty of this kind.
II. APPARENT /OSTENSIBLE AUTHORITY OF AGENT [Sec 237]

An agent without authority done an act or incurred obligation to third person

on behalf of his principal

The principal is bound by such acts or obligation if he has by his words or

conduct induced such third person to believe that such acts and obligations
were within the scope of the agents authority

III. AGENTS AUTHORITY IN EMERGENCY [Sec 189]

In state of emergency, an agent has authority to do all such acts for the
purpose of protecting his principal from loss as would be done by a person of
ordinary prudence, in his own case under similar circumstances
Eg: 1. An agent for sale may have goods repaired if it be a necessary.
2. A consigns provision to B at Calcutta, with direction to send them
immediately to C, at Cuttack. B may sell the provisions at Calcutta, if they will
not bear journey to Cuttack without spoiling

IV. AGENTS ACTS IN EXCESS OF AUTHORITY[SEC 227- 228]

1. An agent exceeds his authority, actual or apparent, the principal is not bound by
the excess work.
2. but it is separable from the authorised work the principal will be bound to that
extend
In Ahammed v Mohd. Kunhi, [AIR 1987 Ker 228],
The agent was authorised to sell half a right over a property and he contracted to
sell all the rights, the principal became bound only to the extend of half the rights
authorised by him, they became separable from the rest

3. If the authorised work is not separable from the rest, the prinicipal may
repudiate the whole of the transaction
A authorises B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one
sum of 6000 Rs. A may repudiate the whole transaction.
IV. EFFECT OF NOTICE TO AGENT [Sec 229]

A notice served to or information obtained by an agent in the course of the

business transacted by him on behalf of his principal, shall, as between the
principal and third parties, have the same legal consequence as if it had been
given to or obtained by the principal.
In Jani Nautamlal Venishanker v Vivekanand Coop Housing Society, AIR 1986
Guj 162
1. The secretary of the society was de facto and de jure incharge of the affairs of
the society

2. A notice was given to him of the fact that a partner of a firm with which the
society had dealings had retired, which operated as a notice to the society.
V. LIABILITY FOR AGENTS WRONGFUL ACTS
Agents Misrepresentation and Fraud [Sec 238]

1. To fix the principal with vicarious liability for the wrongs of his agent ,it is
necessary that the wrong must have been committed in the course of the
principals business.
2. As with respect to Sec 238, misrepresentation or fraud committed in the course
of business, have the same effect on the agreement made by the agent as if it was
done by the principal himself and will be bound.
3. But if it outside the scope of authority, will not affect the principal

Agents Torts
1. If one chooses to do business through an agent an agent may in certain
situations be liable for a tort committed by the agent
2. the doctrine of respondeat superior (let the superior answer/let the principal be
laible) will applied to make the principal liable where the agent commits a tort
engaged in the business of the principal.
In Lloyd v Grace Smith and Co, [1912] AC 716,
1 Grace Smith and Co were a firm of solicitors of some repute and respectability.

2. Mrs. Lloyd , a widow being dissatisfied with the income of her two cottages,
consulted the firms clerk, was incharge of the conveyancing business, as to how
to improve the income.
3. The clerk advised her to dispose off her property and asked her to bring the title
deeds which she did and obtained her signature in two papers

4. The clerk converted these papers into a sale deed to himself and subsequently
disposed of the property and misappropriated the proceeds.
5. It was held that the firm is vicariously liable for the fraud committed by their
representative in the course of his employment.

RIGHTS AND LIABILITIES OF UNDISCLOSED PRINCIPAL [Sec 231- 232]

1. The doctrine of undisclosed principal comes into play when the agent neither
discloses the existence of his principal nor his representative character.

2. As a general rule, when an agent has contracted in his own name, he is bound
by the contract. He may be sued on it and he has the right to sue the third party
and the principal is not liable in such cases.
But the principal too has the right to intervene and assert his position as an
undisclosed party to the contract. This right is referred to as an anomalous
right because it does not fit in any of the established principle of the law of
contract.

In Gurratt v Cullum[(1710) Bull P 42],

An agent sells his principals property in his own name and receives the price, the
principal is obviously entitled to trace his money and recover it, even if the agent
has gone bankrupt.
Under the foll: conditions Principal can intervene:
1. Firstly. the third party would have against the principal the same rights which
would have had against the agent if the agent had been a principal
A (agent) , who owes 500/- to B (third party),sells1000/- rupees worth of rice to
B.
A is acting as an agent for C (Principal) in the transaction.
But B has no knowledge nor reasonable suspicion that such is the case.
C cannot compel B to take the rice without allowing him to set off As debt.

2. Secondly, if the principal discloses himself before the contract is completed, the
third party may repudiate the contract if he can show that if he had known who
the principal was or that the agent was not the principal, he would not have
contracted
In Said v Butt ([1920] 3KB 497),
1. A theatre ticket was purchased by a person through an agent knowing fully that
a ticket would not have been issued on personal grounds.
2. It was held that the theatre- owner had the right to repudiate the contract and
exclude him from admission.
3. Lastly, an undisclosed principal cannot intervene if some expressed/ implied
term of the contract excludes him from the contract